The Securities and Exchange Commission filed a civil suit against Ripple Labs Inc. and two of its founders on Dec. 22, 2020, claiming it violated investor-protection laws by selling a cryptocurrency similar to bitcoin.
At issue is whether XRP, a cryptocurrency created by Ripple, should be treated as a security or just as an asset. XRP is the third largest virtual currency, with billions of dollars in daily volume.
As a security, of course, XRP would have to be registered with the SEC. Cryptocurrencies have been categorized as assets by the Internal Revenue Service, with profits and losses on sales subject to normal taxation rules. But if cryptocurrencies were to qualify as securities, their issuers would face much greater regulatory scrutiny. The SEC has sued startups over the years for selling cryptocurrencies, but the challenge to XRP’s status marks one of its highest-profile cases against a cryptocurrency creator.
Ripple created XRP (originally called “Ripple”) in 2012, then later handed over control of its development to a network of open-source developers. The company still retains about 6.4 billion XRP, with an additional 48 billion in escrow, which it sells to the public now and then. Ripple has distributed 45 billion XRP since inception. While Ripple uses XRP as part of its payments products, it represents only 1.6% of XRP’s total volume, according to the SEC, with the balance coming from secondary exchanges.
The SEC’s actions did not come as a surprise, as it had telegraphed its position that XRP might be a security in the past. But the filing of the SEC’s complaint rippled (bad pun intended) throughout the industry and resulted in suspension of trading on a number of exchanges. In addition to seeing if the SEC prevails in its suit against Ripple, it also remains to be seen if the SEC decides to take steps against any cryptoexchanges that listed XRP (none of which are licensed to list or trade securities in the U.S.) for listing and trading a security.